QUESTION: You don’t know what you’re talking about. A few weeks ago, you suggested a home buyer take advantage of the new tax law by obtaining as large an “acquisition mortgage” as possible to maximize her income tax deduction for itemized interest.
However, you failed to emphasize the interest savings if she instead made the biggest down payment possible and then obtained a small mortgage to pay the balance of the home purchase price. For every $1 of home mortgage interest deduction, what good does it do to get only 28 cents of federal tax deduction?
ANSWER: You missed the point. The reason home buyers should make a minimum cash down payment and obtain the maximum available mortgage is that the 1987 Tax Act only allows itemized interest deductions on an acquisition mortgage (up to $1 million) plus a $100,000 home-equity loan.
When a home buyer makes a large down payment and later realizes his mistake, it is too late to change his mind. For example, if a home buyer pays all cash for a home and then later decides to obtain a home loan, interest on only up to $100,000 on a home-equity mortgage is tax-deductible.
In addition to the itemized interest tax deduction, another major advantage of making as small a down payment as possible is that the home buyer then has cash available for emergencies or investments. Borrowing cash on short notice is not easy and can be expensive, so making a small down payment makes home ownership more enjoyable, too.
Three Years Too Short for Balloon Payment
Q: We are considering buying a home that we can finance by assuming its existing VA mortgage, and the seller will carry back a second mortgage for most of the balance. However, we are worried because the seller wants a balloon payment on the mortgage in just three years. We think this is too short a time. What do you think?
A: I think you will feel much better if you don’t accept that short-fuse, three-year balloon payment. Especially if you are making a very small cash down payment, in just three years you might not have enough equity in the house to refinance so you can pay off the balloon payment. Five to 10 years would be much better for you.
Adjustables Have Lost Their Advantage
Q: My husband and I are in the process of getting a mortgage to acquire the home we are buying. But we are getting conflicting advice from mortgage lenders as to whether we should get a fixed- or adjustable-rate mortgage.
One S&L; was so eager to make us an adjustable-rate mortgage it approved our loan in about 20 minutes, subject to the appraisal. But we have adequate income to get a fixed-rate loan with which we feel more comfortable. It seems to me the adjustable-rate mortgages are just too risky and too expensive. What do you advise?
A: The adjustable-rate mortgages have backfired on lenders. Their big problem is the two indexes used to adjust interest rates, the Cost of Funds Index and the Treasury Bill Index, are too high, compared to fixed-rate mortgages.
The result is that most home buyers, like you, prefer fixed-interest rate loans because there are no uncertainties. The adjustable-rate mortgages shift the interest rate risk to the borrower, but without any significant advantages.
When ARM loans were created, fixed-interest rate loans were very expensive. The ARMs looked good because their interest rate was at least 2% below fixed-rate mortgages. But today the difference is less than 1%, so ARM borrowers receive no benefit for the risk that ARM interest rates might increase. You would be wise to take the fixed-rate mortgage. Not only will you sleep better, but you won’t run the risk of having to pay higher monthly mortgage payments.
Crooked Lender Cashes All Post-Dated Checks
Q: I got a kick out of your suggestion to a reader a few weeks ago on how to handle an out-of-town mortgage loan servicer who claimed the monthly mortgage payments were received late each month.
Several years ago, I had the same problem with my lender. I used the same idea you used and sent a year’s post-dated checks in advance so the lender could never claim they didn’t receive my payments. But do you know what the crooked S&L; lender did? They cashed all my checks at once!
Since I don’t keep that much money in my checking account, the checks bounced. When my banker called me, I explained what was happening, and she returned the checks to the S&L.; I wrote to the state attorney about the attempted embezzlement by the lender for depositing my checks before their due date.
He didn’t prosecute but warned the lender about the consequences of attempted grand theft. Since then, I have had no trouble with that lender who, I’m sure, is still swindling innocent borrowers out of their late charges.
A: First, let me say most mortgage loan servicers are honest. But there are some dishonest loan servicers.
I received several letters about how I handle crooked loan servicers who claim loan payments are not received until after the day when late charges accrue. As you may know, mortgage loan servicing is a multibillion dollar industry. The servicing lender gets to keep the late charges, so there is a financial incentive for dishonest loan servicers to claim loan payments are received late.
For example, recently I had lunch with a professional property manager who told me of his trouble with a giant insurance company. He pays a monthly loan payment on a big office building of more than $100,000 to this lender. Although the insurance company is located in the same city, the lender often claimed my friend’s loan payment was received late, so the lender could collect the monthly late charge of more than $10,000. So now he sends the payment via Federal Express to be sure it is received on time.
The way I handle the problem with a dishonest loan servicer is to send, via certified mail, a year’s post-dated loan payment checks stapled to the loan payment coupons. I attach a letter to the vice president for loan servicing explaining one check should be deposited each month but never before the due date.
To make certain my bank doesn’t accidentally honor a check that is deposited early, I circle the due date. Most lenders are glad to receive my payment checks early.
Questions and comments may be sent to the Real Estate Editor, Los Angeles Times, Times Mirror Square, Los Angeles 90053.